Part II: Asset and Liability Management Using LSMC - Accuracy and Performance

In the previous article, ”Part I: Asset and Liability Management using LSMC - Introduction to the Framework”, we presented the asset and liability management (ALM) framework based on the replicating portfolio approach. Additionally, that article briefly introduced the least-squares Monte Carlo (LSMC) method as a time efficient alternative to the full nested Monte Carlo (MC) simulation.

In the subsequent part, we conduct a comparative study between the LSMC and the full nested MC method in the context of calculating the distribution of the expected net asset value (NAV). The full nested distribution is set to represent the actual NAV’s, providing a benchmark for the evaluation of accuracy and performance of the LSMC method.